Bad News from Your Friend at the IRS

2/4/2013

You may not realize it, but you have a friend at the IRS. Her name is Nina Olson, and she's the "Taxpayer Advocate." Olson and her 2,000-person staff are an independent organization within the IRS, charged with cutting through IRS red tape when the Service can't get the job done itself. Are you stuck between cogs in the IRS machine? Have you experienced a delay of more than 30 days to resolve your issue? Have you not received a response or resolution to your problem by the date the IRS promised? If so, Nina Olson and her 1,400 Case Advocates throughout the IRS are waiting to help.

Earlier this month, Olson released her 762-page Annual Report to Congress, and it's not pretty. In fact, it probably reads a lot like what your report on the IRS might read if your job was to dig up problems. A sample of her findings:

The tax code is a mess. It's nearly 4 million words long, with over 4,680 changes since 2001 – an average of one per day. Complying with tax laws consumes the equivalent of 3 million full-time workers annually. And only 16% of Americans think the tax code is "fair" (that puts the tax code slightly above Congress, at 9%, but still lagging Donald Trump, cockroaches, Brussels sprouts, and NFL replacement refs). The 4-million word code tops the problem list, and her report calls for overhauling the tax laws, eliminating "sunset" clauses like the expiration of the Bush tax cuts that led to the recent fiscal cliff crisis, and eliminating phase-outs that deny benefits as your income increases.

The Alternative Minimum Tax, a parallel tax system originally introduced to make sure that high-income taxpayers don't take advantage of too many deductions and credits without paying their fair share, is an even bigger mess. The AMT was never indexed for inflation until this month's fiscal cliff bill, so Congress repeatedly had to "patch" it to keep it from reaching even further into the middle class. The result, Olson writes, "is one law that grants popular tax benefits (the regular tax code), another law that eliminates the benefits (the AMT), and then yet a third law that undoes the elimination of benefits (the patches), usually at the last minute – a legislative Rube Goldberg contraption of unnecessary complexity." Her recommendation? Scrap it.

"Customer service" is a disgrace. Telephone and correspondence services have deteriorated over the last decade. Online services are primitive. "Processing flaws" and service delays are undermining taxpayers' rights to representation. In some cases, IRS rules actually discourage taxpayers from complying with the law. For example, the Offshore Voluntary Disclosure Program, which lets taxpayers who failed to report foreign financial accounts come clean, actually scares folks who inadvertently failed to report them and keeps them from 'fessing up.

The IRS is underfunded. Olson likens the IRS to the government's "accounts receivable" department, and reports that they bring in seven dollars for every extra dollar they spend. “It is ironic and counterproductive that concerns about the deficit are leading to cuts in the I.R.S. budget, when those cuts are making the deficit larger,” says Olson. “No business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors.”

Are you thoroughly depressed yet? It gets worse. That's because these are essentially the same recommendations Olson has made in every Annual Report she's filed with Congress since 2001. And yet, we still have an offensively complicated tax code, a ridiculously ineffective Alternative Minimum Tax, and hideous thickets of bureaucracy that can drain taxpayers' souls.

While we can’t promise to fix the broken system, we can promise to provide the best and brightest tax professionals out there to navigate it for you if you ever get snared in it.

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